POTUS Campaign | “Free” Trade & VAT Tax Reform

It is little wonder that middle-class workers are flocking to the speeches of Sen. Bernie Sanders and Donald Trump.  Twenty-five years of “free” trade agreements have eroded the hope of millions of Americans for higher-wage manufacturing jobs, which have fallen by nearly one-third since 1990 accompanied by stagnant wages.

What policies might help to stop the bleeding?  Mr. Trump sees tariffs, which could threaten world trade and cause economies to implode.  Secretary Hillary Clinton and Sen. Sanders envision higher education as a ladder to higher paying employment, but that is a longer-term solution based upon speculation that those jobs can and will be created in sufficient numbers.

Most effective in the short-term would be a shift in the way we tax corporations to match our global competition.  Changing to a Value Added Tax as a replacement for the Corporate Income Tax would go a long way towards making American workers more competitive.  How?  Because VATs are border-adjustable, i.e., subtracted from exports and added to imports to eliminate the cost of government from the price/value relationship of goods crossing borders.  For example, China has a 17% VAT that is added to their imports, and 17% is subtracted from the price of their exports.  That is a big difference, coming and going.  Likewise, Germany has a 19% VAT that has enabled their higher-wage country to still be very competitive with higher wages.

Among the presidential candidates, the only remaining contender proposing this shift in how we tax ourselves is Sen. Cruz.  Whether you like his other positions or not, this tax reform deserves your support.  Sen. Paul has proposed a similar plan.  This should not be a partisan issue.  Gov. Jerry Brown ran for president in 1992 based upon the same tax reform.  President Bill Clinton has endorsed the concept, and so have many labor leaders.  Will Hillary Clinton…or Donald Trump?

It’s time we got smart about how we tax ourselves, if we want to compete in the world economy.  It’s time for VAT.

Marco Rubio Attacks Ted Cruz on Tax Reform

Sen. Rubio’s attack on Sen. Cruz has taken an unfortunate turn. Sen. Rubio has called Sen. Cruz’s tax reform plan “sneaky” and a “liberal scheme” supported by President Obama and Nancy Pelosi. That’s laughable on the face, but may sadly prove effective.

Opponents of VAT fear that its simplicity would encourage more taxation and spending, but they focus on the VAT being an “add-on” tax and not a replacement for other taxes. As Larry Summers said, “Liberals think VAT is regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” With proposals from Sen. Cruz and Sen. Paul replacing the Corporate Income Tax by a VAT, perhaps this is a sign that the time has come.

The VAT itself is not a tool to deliver more expensive social programs.  VAT should be seen for what it is…an efficient mechanism for raising revenue and partially leveling the playing field in trade.  How we use the funds raised and how much revenue we should raise are separate issues, and should be debated separately.

The U.S. is at a major competitive disadvantage without a VAT of its own. All our trading partners utilize a VAT, as do over 160 countries today.  Far from a “European-style” tax, VAT is the world class tax system for international trade.

Our trading partners tack on significant VAT percentages to our goods and services as they cross their borders, a de facto tariff. For example, China adds 17% VAT to their imports from the U.S. and Germany adds 19%, just below the European average. Were the U.S. to replace the CIT by a VAT, it would remove this competitive disadvantage; U.S. exports would be cheaper and our imports..which arrive with the exporting country’s VAT subtracted..would face the same taxes as domestically produced goods and services.

Eliminating the CIT would end the incentive for multi-national corporations to park profits in lower-taxed countries. Forget inversion mergers. With zero CIT, the U.S. would become the lowest income tax country and capital would flow back to our shores. Foreign multi-national companies, too, would seek to move profits retained elsewhere to the U.S. Gone would be the double-taxation of dividends; stock market values should soar.

VAT remains a hot potato. To date, no Democrat for the presidency since Jerry Brown in 1992 has dared to raise the issue of a consumption tax.  Hillary Clinton will probably not mention VAT, even though President Clinton has previously endorsed the concept of VAT replacing other taxes.